Sales Tax In Health Law Targets Medical Devices

Some industries stand to benefit now that the health care law has been upheld by the Supreme Court. For makers of medical devices, the ruling means frustration because a sales tax on their equipment stays in place.

Republicans like to call President Obama's health care legislation a job killer. Democrats say that's not true. But companies that make medical devices say in their case the rhetoric is justified.

As NPR's Chris Arnold reports, they say the law singles out their industry with an unfair and, as they see it, misguided tax.

CHRIS ARNOLD, BYLINE: When the health care law was crafted, proponents said they wanted to pay for it without adding to the federal deficit. So as part of that, starting in January, a new sales tax will target medical devices; anything from replacement knees and hips to all kinds of tools for surgery.

(SOUNDBITE OF MACHINERY)

ARNOLD: At a company north of Boston called AbioMed, CEO Michael Minogue is showing me a heart pump implant. The sound that you hear is coming from a big testing machine that's putting the actual small implantable pump through a stress test. The pump's about the size of a fat poker chip.

MICHAEL MINOGUE: This device would be left in the patient for an extended period of time to allow these patients to get better, and then you would remove the device.

ARNOLD: So this looks like a little pacemaker or something, but that actually pumps.

MINOGUE: Exactly. It improves their cardiac output. It helps reduce the pressure the heart works against.

ARNOLD: Minogue says this little pump, which hasn't yet been FDA improved, could help a patient avoid much more expensive open-heart surgery. That kind of thing would reduce health care costs, and when it comes to the economy, Minogue's company has been growing and creating good-paying jobs. So he says that this looming tax facing his industry doesn't make any sense.

MINOGUE: I don't think taxing the innovators and taxing the group of companies that provide innovation for healthcare is a smart idea, but the biggest concern I have, and what's unprecedented, is to tax companies that are not yet profitable, and in our industry where 70 percent of the companies are not yet profitable, this is gonna have detrimental effects in their job growth, in their survival.

ARNOLD: Okay. So here's how this new tax works. When a medical device gets sold, there will be a 2.3 percent sales or excise tax. Now, people who support this tax say that the medical device makers are exaggerating about the impact. Paul Van de Water is an economist with the left-leaning Center on Budget and Policy Priorities. He says that this tax is basically the same as a sales tax that you pay at the grocery store.

PAUL VAN DE WATER: The grocery store is collecting the tax. The grocery store is the institution that sends the tax to the state government, just the way the medical device manufacturer is going to write the check to the Treasury.

ARNOLD: Van de Water says that the tax doesn't really target the medical device makers that much. They'll just pass most of the cost along to their customers, who are mostly big hospitals, the same way a grocery store charges their customers. But the industry disagrees. David Nexon is with the medical device trade group called AdvaMed.

DAVID NEXON: There's a difference between a tax that, you know, an individual consumer pays as opposed to one that you're negotiating a price with a large, sophisticated buyer.

ARNOLD: In other words, Nexon says a hospital chain will push back and resist paying anything extra.

NEXON: In this very competitive market, it's extremely difficult for our members to raise prices.

ARNOLD: Now, if Nexon's right, and medical device makers do end up paying the bulk of this tax themselves, that would hit a lot of them very hard. A two percent tax on sales, that might sound kind of small, but it could be a very big chunk of a company's profits.

MINOGUE: It'll be about four million dollars to our company.

ARNOLD: Back at AbioMed, Michael Minogue says his company is just becoming profitable, so that's more than his entire profits this year.

MINOGUE: It's more than what we pay in health care for all the employees, and it's about 15 percent of our research and development fund per year.

ARNOLD: Still, economist Paul Van de Water is skeptical. He says it's not like a hospital will decide to do fewer hip replacement surgeries just because of a two percent tax on replacement hips. So he says the device makers should be able to pass along the cost. The industry, though, is lobbying hard. Last month the House of Representatives voted to repeal the tax, but there's likely to be a bigger hurdle in the Senate. Chris Arnold, NPR News, Boston.

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